Ireland’s property bank stores up trouble

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Most buyers are happy if their putative purchase gets cheaper. However, Dublin’s government is watching the on-off liquidation of developer Liam Carroll’s assets with trepidation.

Dublin has committed to acquiring property loans with a face value of some 90 billion euros from the country’s beleaguered banks at a so-far unspecified discount to establish a “bad bank”. The idea is that by removing such loans to the new National Asset Management Agency (NAMA), the banks would be free to start lending again.

In principle, you might think that ministers would want that discount to be as fat as possible. A fire sale of the property assets of one of Ireland’s biggest developers should show just how far prices have really fallen.

However, opposition politicians believe that the government wants to overpay for the loans. They have fixed on finance minister Brian Lenihan’s promise that the state would pay the “long term economic value” rather than today’s depressed market price of the underlying loans.

Richard Bruton, finance spokesman for the Fine Gael party, warns that “taxpayers will be forced to overpay the banks for toxic developer loans. Rosy and baseless optimism about a recovery in property prices can hobble the public finances for a generation.”

Moreover, the opposition is worried that the banks may be colluding in trying to keep developers like Carroll afloat long enough to offload their loans into NAMA. There is plenty of evidence that banks are rolling up interest on developers’ loans rather than pulling the plug.

The case of Carroll is instructive. Only one of his eight lenders has pushed to have a liquidator appointed. ACC Bank, which is owed “just” 136 million euros, out of more than 1 billion (Carroll’s entire empire is estimated to owe 2.8 billion), pulled the plug. Owned by Rabobank, which has decided to exit the Irish market, it has little long-term interest in playing a longer game.

The other seven banks did not pursue Carroll’s companies through the courts despite underlying valuations that a High Court judge described as bordering on the “fanciful”.

Bruton is worried that the bigger banks will try to buy off smaller banks like ACC in order to avoid a court bankruptcy process that will reveal the true value of Irish development sites. The mainstream banks’ actions are entirely sensible.

Ireland’s property market is moribund and the only buyer appears to be the government. Even Patrick Coveney, chief executive of Greencore, a food group that had planned to develop old sugar plants in rural towns (alongside Carroll) now says, “You would be insanely optimistic and absolutely naïve to think there’s now a market for building out the sort of developments that were envisaged 18 or 24 months ago.”

There is even method in Lenihan’s madness. The government has been pressed into a series of measures in an attempt to shore up Ireland’s financial sector, from a 2-year guarantee of the system’s liabilities, to the nationalisation of Anglo Irish Bank and the capitalisation of AIB and Bank of Ireland, the two big banks.

If Lenihan forces the banks to take too big a haircut, he may be forced to take them — and their bloated loans — onto the public sector balance sheet. With Ireland’s fiscal deficit running well into double digits, and its credit rating under threat, the country can ill-afford this.

Lenihan has the support of the Irish Association of Investment Managers. It s head, Frank O’Dwyer, said, “I strongly believe that the Department of Finance and agency understand that, while they have to be fair to the taxpayer, the key audience is international financial markets. An excessive haircut, with any taint of political motivation, any sense of “let’s stick it to these guys”, would erode confidence.”

O’Dwyer is doing exactly what he should be — defending the interests of his members, who manage about 300 billion euros, which includes big shareholdings in the banks.

However, he will find it hard to define what an excessive haircut might be. One economist reckons that house prices could fall by as much as 80 percent in real terms. He added that there could be more houses destroyed than built over the coming years.

Others like to draw historical parallels. One property website cites the example of Regency Dublin. Much of the city’s fine Georgian squares were built speculatively during the 1790s.

Houses in Mountjoy, then a particularly grand square, sold for 8,000 pounds in 1791. After the Act of Union between Britain and Ireland consigned Dublin to backwater status, they were changing hands for just 2,500 pounds. And half a century after that, as the famine raged in 1849, they were worth a paltry 500 pounds.

Lenihan may find that even the long term will not be long enough to restore property markets to the level he wants.

Author Profile

Margaret Doyle is a Reuters Breakingviews columnist, based in London. She writes about investment banking. She has been a journalist for over 14 years. She has written for The Daily Telegraph and The Economist and presented various radio programmes for the BBC. She began her career as a consultant at McKinsey & Co. She has an economics degree from Trinity College, Dublin and an MBA from Harvard Business School, which she attended as a Fulbright scholar. She is a Conservative Member of Westminster City Council.